Shareholder Wars: Internal Disputes In Close Corporations ...

Shareholder Wars: Internal Disputes
In Close Corporations Do Not

Always Lead to Judicial Dissolution

BY PETER A. MAHLER

New York courts have long struggled with the lution would be beneficial to the shareholders.” The
question of whether a breakdown in personal inherently elusive definitions of “internal dissension”
relations between two 50% shareholders in an and “beneficial to the shareholders,” together with the
otherwise viable closely held business corporation war- lingering influence of decisions pre-dating the enact-
rants judicial dissolution. The answer has fluctuated, ment of BCL § 1104(a)(3), have made it difficult for the
with some courts emphasizing the company’s financial courts to create any bright-line rules or otherwise lend
viability and others the loss of trust between the co- predictability to petitions brought under the section.
owners, as warring factions duel over the myriad busi-
ness and personal disputes that can and often do erupt The Dissolution Dynamic
in close corporations. Dissolution petitions brought by 50% shareholders

A recent Appellate Division decision, in a contest almost always rely on the catch-all ground of internal
between 50/50 owners of a close corporation that dissension. More often than not they also rest on one or
owned a number of apartment buildings, suggests anew both of the deadlock provisions. In many instances,
the need for counsel in such cases to focus their presen- however, allegations of deadlock fall short because the
tation on the equities that militate for or against disso- shareholders have never followed corporate formalities
lution. such as holding shareholder meetings or board elec-
tions.3 The petition, therefore, may stand or fall on the
In the decision, In re Fazio Realty Corp.,1 the Second petitioner’s ability to demonstrate internal dissension
Department dismissed a dissolution petition despite and benefit to the shareholders from dissolution, terms
acknowledging undisputed evidence “that there exists not defined in the statute.
considerable and apparently ever-increasing internal
corporate conflict.” The court focused on the petition- A petition for judicial dissolution under BCL § 1104
er’s failure to show that the dissension precluded the usually follows a period of mounting tension between
“successful and profitable conduct of the corporation’s the two 50% factions, and a failure by the principals to
affairs.”2 Denied a divorce, the Fazio shareholders pre- reach an accord for one to buy out the other or to sell the
sumably went home and continued profitably to throw business to a third party or to find some other non-judi-
frying pans at one another. cial means of achieving a business divorce. The dynam-
ics often are such that one faction feels that just by bring-
Section 1104(a) of the Business Corporation Law ing a dissolution proceeding it can gain an advantage in
(BCL) authorizes a petition for judicial dissolution on buy-out negotiations. Particularly in service companies
any one of three grounds by holders of 50% of the cor- without long-term customer contracts, the faction that
poration’s voting stock. The first two grounds concern believes it controls the customer relationships, and
deadlock at the board and shareholder levels.
Specifically, BCL § 1104(a)(1) authorizes dissolution PETER A. MAHLER is a partner at
when the votes required for board action cannot be Farrell Fritz, P.C. in Manhattan (e-mail
obtained due to division among the directors as to man- [email protected]). He prac-
agement of the corporation’s affairs. BCL § 1104(a)(2) tices in the area of business litigation,
authorizes dissolution when the shareholders are so including shareholder, partnership
divided that the votes required for the election of direc- and LLC membership disputes. A
tors cannot be obtained. graduate of U.C. Santa Barbara, he
received his J.D. from New York
The focus of this article is the third ground, contained University School of Law.
in BCL § 1104(a)(3). This section authorizes a dissolution
petition when “there is internal dissension and two or Reprinted with permission from the New York State Bar Association
more factions of shareholders are so divided that disso- Journal, October 2004, Vol. 76, No. 8, published by the New York State Bar
Association, One Elk Street, Albany, New York 12207.
28
Journal | October 2004

therefore can walk off with the dissolution spoils, may e.g., the petitioner has a separate business that will ben-

feel that blowing up the company is its best option. For efit from dissolution, or is using dissolution to steal cus-

the same reasons, the other 50% faction has a strong tomer relationships for a new business excluding the

incentive to fight dissolution. respondent, or is using dissolution to side-step buy-sell

The BCL § 1104 dynamic is heavily influenced by the provisions in a shareholders’ agreement.7

absence of a statutory buy-out right. In contrast, a dis- No matter how smartly played on both sides, the

solution petition brought under BCL § 1104-a for share- inescapable fact not lost on the court is that the co-equal

holder oppression gives the business owners, for what-

other shareholders the ever reason, are not getting

absolute right to avoid dis- The real challenge for the along. Should that be

solution by electing to pur- respondent’s counsel is to answer enough to grant, in effect, a
chase the petitioner’s no-fault business divorce,

shares for fair value under the petitioner’s accusations without or should the court probe
more deeply into the bona
BCL § 1118.4 The typical fides and depth of the

BCL § 1104-a petitioner is a resorting to highly personal attacks

minority shareholder look- against the petitioner and thereby alleged dissension? BCL
ing to be bought out by the § 1104(a)(3) also requires a
majority shareholder who playing into the petitioner’s hand. finding that the sharehold-

likely is the natural buyer. ers are so divided that dis-

In a 50/50 corporation solution would be “benefi-

there may be no one natural buyer. In other words, even cial to the shareholders.” Beneficial how? Financially?

though a 50% shareholder also has standing to seek dis- Emotionally? Should the court give any consideration to

solution under BCL § 1104-a,5 he or she is unlikely to do the survival interests of the corporation as an entity dis-

so (i.e., will be unable to avoid the BCL § 1118 trigger) if tinct from its owners?

the game plan is to break up the company or to gain the The Lead-Up to the Internal
negotiating edge in a voluntary buy-out.6
Dissension Statute
Once the proceeding is started, the interplay between To address these questions it is helpful to understand
the petitioner and the respondent usually follows a
standard pattern. The petitioner alleges that on one or the derivation of BCL § 1104, and the case law that pre-
more business issues invariably described as critical, the ceded the addition of internal dissension as a ground for
two 50% factions are at complete odds and that their dissolution as part of the corporate law overhaul, cul-
inability to reach a consensus is crippling the company’s minating with the enactment of the BCL in 1961.

business relations and profitability. Savvy petitioner’s Statutory authority for judicial dissolution of New
counsel will spice the petition with allegations of devi- York corporations reaches back to the early 1800s.8

ous or at least boorish behavior by the respondent During most of the 19th century, judicial dissolution

shareholder in the hope of provoking tit-for-tat mud- was limited to petitions brought by a majority of the

slinging in the respondent’s answering papers. “You directors based on insolvency or because dissolution

see, Judge,” petitioner’s counsel will urge at the initial would be beneficial to the shareholders and not injuri-
hearing, “regardless of who’s right or wrong, these par- ous to the public interest.9 In 1876 judicial dissolution

ties obviously detest one another. They need a divorce!” authority expanded to include petitions based on direc-

The respondent’s answering papers ordinarily down- tor and shareholder deadlock regarding management of
play management conflicts and point out that the share-
holder-managers are still performing their respective the corporation’s affairs, still requiring a showing of
duties, and that the company remains profitable. If the
company has any non-shareholder employees, the benefit to the shareholders and lack of injury to the pub-
“public” interest in keeping them employed and paying lic interest.10
taxes will be trumpeted. The real challenge for the
respondent’s counsel – particularly when dealing with a In 1944, an amendment to § 103 of the General
client angered by what he or she perceives as betrayal Corporation Law11 (GCL) added a second ground for
by a business partner – is to answer the petitioner’s
accusations without resorting to highly personal attacks dissolution based on shareholder deadlock with respect
against the petitioner and thereby playing into the peti- to the election of a board of directors.12 GCL § 117 man-

dated dissolution based on deadlock (“the court must
make a final order dissolving the corporation”13) so long

as the court also found that dissolution would be bene-

ficial to the shareholders and not injurious to the public.

tioner’s hand. This usually is handled by trying to show One of the earliest cases construing the 1944 amend-

that the petitioner is seeking dissolution in bad faith, ments is the First Department’s 1949 opinion in In re

Journal | October 2004 29

Cantelmo,14 where it reversed the trial court and denied receive salary did not frustrate the corporate business
a 50% shareholder’s dissolution petition. The petitioner and was remediable by means other than dissolution.23
alleged “hopeless deadlock” between the shareholders,
who were unable to agree upon a third, impartial direc- The Court of Appeals affirmed. Finding it undisput-
tor and therefore could not elect a board to control the ed that “these two equal shareholders dislike and dis-
corporation’s business. The court disagreed, noting that trust each other” and that the petitioner “is in an
the business was functioning actively and profitably, uncomfortable and disagreeable situation for which he
and that the petitioner had made no bona fide effort to may or may not be at fault,” the Court nonetheless held,
agree upon a third director. Rather, the court found that “[t]here is no absolute right to dissolution under such
the petitioner’s object was “to force respondent out of circumstances.”24 The Court then added:
the business and, in effect, to obtain for himself . . . the
benefits to the corporation built up over the years by the Even when majority stockholders file a petition because
joint efforts of both parties.”15 of internal corporate conflicts, the order is granted only
when the competing interests “are so discordant as to
Cantelmo obviously was no shareholder love-fest. The prevent efficient management” and the “object of its
dissenting opinion refers to “two 50% stockholders, in corporate existence cannot be attained.” The prime
irreconcilable dissension and engaged in constant legal inquiry is, always, as to the necessity for dissolution,
warfare under circumstances where corporate success that is, whether judicially-imposed death “will be ben-
and efficiency imperatively demand co-operation.”16 Yet eficial to the stockholders or members and not injurious
the court refused a business divorce, essentially ruling to the public.”25
that the petitioner’s bad faith and the company’s prof-
itability negated any finding of benefit to the sharehold- Three months later, the Court of Appeals decided
ers. Seamerlin where it reversed the Appellate Division’s
affirmance of a trial court order granting a dissolution
To similar effect is a trial court decision several years petition. Seamerlin involved a single-asset real estate
later in In re Bankhalter,17 denying a motion to vacate an operating company that subleased portions of a com-
order of reference on a dissolution petition.18 The opin- mercial building to a separate business owned by one of
ion describes “numerous disputes, marked with an acri- the two shareholders and to a third-party business. The
mony reminiscent of matrimonial litigation,” but then company consistently paid salary and dividends to its
goes on to say that “not every unresolved conflict in cor- owners.
porate management is fatal. The stymie must pertain to
matter material and essential to the existence of the cor- The petitioner sought dissolution based on director
poration.”19 and shareholder deadlock. The petition accused the
respondent shareholder, who had been judicially
The emphasis on corporate viability rather than the declared incompetent shortly before the proceeding, of
erosion of the shareholders’ relationship seems to reach various corporate improprieties, of using vile and abu-
its pinnacle in a pair of decisions in 1954 by the Court of sive language and of threatening the petitioner with
Appeals in In re Radom & Neidorff 20 and In re Seamerlin bodily harm. A referee reported that the dissolution
Operating Co.21 should be denied because management was not para-
lyzed, the company was making a profit, and a sale of
Radom involved a profitable music printing and the corporation’s leasehold interest would not realize
lithography company in business for more than 30 much, if any, cash. The trial judge disagreed with the
years, owned equally by estranged siblings, one of referee’s findings and ordered dissolution, and the
whom sought dissolution based primarily on the Appellate Division affirmed.26
other’s refusal to co-sign his salary checks. The petition-
er was president and ran the business by himself. The The Court of Appeals’ reversal turned primarily on
trial court held that the many accusations and counter- the trial court’s inability to overrule the findings of a ref-
accusations in the parties’ submissions showed a “basic eree appointed to hear and determine. More important
and irreconcilable conflict between the two stockholders for present purposes is the Court’s narrowly framed dis-
requiring dissolution, for the protection of both of them, solution standard, as follows:
if the petition’s allegations should be proven” at a hear-
ing.22 There were three questions of fact presented in the
present case: (1) were the directors of Seamerlin unable
On interlocutory appeal, the Appellate Division to agree on a matter of corporate management;
reversed and dismissed the petition, citing an increase (2) would dissolution be non-injurious to the public;
in the corporation’s profits during the pendency of the and (3) would dissolution be beneficial to the share-
proceeding and finding that the petitioner’s failure to holders. All three questions must be answered in the
affirmative before a dissolution will be warranted or
may be ordered. Two of them were decided adversely
to petitioner by the Referee.27

30 Journal | October 2004

Buy-Sell Agreements
Can Avert Dissolution Trauma

Paying a lawyer to prepare a well-tailored share- the company, who then have a stipulated time period
holders’ agreement is not how most co-owners of a within which to match the offer.
new business want to spend their scarce start-up dol-
lars. Just as discussion of a pre-nuptial agreement may • What if there is no anticipated outside buyer for
be anathema to betrotheds, co-owners in the bloom of the shares? For many co-owned businesses there is no
a promising new business relationship may be ill-dis- market for a non-controlling interest and a first refusal
posed to contingency planning for its demise. therefore does not provide an exit. A common alterna-
tive is the “shotgun” buy-sell agreement whereby a
Considering the modest life span of most multi- shareholder offers either to sell to the other sharehold-
owner businesses, however, such planning makes con- er or be bought out at the same price. Not knowing
summate sense and is a highly worthwhile investment whether the other shareholder is a buyer or seller gives
that can avert the uncertainty and trauma – both per- the offeror a strong incentive to set a fair price. A shot-
sonal and financial – that typically accompanies judi- gun agreement is not advisable, however, for a share-
cial dissolution proceedings. holder with substantially lesser resources than the
other.
Shareholders’ agreements can cover a wide range of
corporate governance and ownership issues. • If there is no outside buyer and the shotgun
Restrictions on stock transfers and provisions for buy- approach is too uncertain, are there other valuation
out of departing shareholders are among the most methods? There are any number of ways to stipulate
important features and litigation preventives. value in the shareholders’ agreement, including fixed
share price with annual updates; book value; formulas
There are many considerations in designing a buy- such as multiple of net after-tax income plus net asset
sell agreement. Here are just a few of them: value; and valuation by the company accountant or an
independent appraiser.
• Should the buy-back of shares, either by the com-
pany or the remaining shareholders, be optional or • Should the shareholders’ agreement encourage a
required? If a shareholder dies, a mandatory buy-back sale of the entire business as opposed to the separate
can prevent the remaining shareholders from having shareholders’ interests? “Tag-along” and “drag-along”
to take on as new partners the deceased shareholder’s provisions can be used to facilitate such a sale when
survivors, who typically are not employed by the com- Shareholder A finds a buyer by giving Shareholder B
pany and whose interests usually conflict with that of the right to be bought out (tag-along) or requiring
the remaining shareholders. The buy-back often is Shareholder B to sell (drag-along) on the same terms
funded by life insurance policies owned either by the and conditions.
corporation under a stock redemption agreement or by
the shareholders under a cross-purchase agreement. • Can the commencement of a dissolution proceed-
ing itself trigger a mandatory buy-out? The Second
• Under what circumstances can a shareholder vol- Department gave an affirmative answer in In re
untarily sell his or her shares, and to whom? The right Doniger,1 where the shareholders’ agreement com-
of first refusal is the most prevalent voluntary buy-sell pelled sale upon “passage or disposition of shares in
mechanism for keeping shares out of the hands of any voluntary or involuntary manner whatsoever,
strangers. The selling shareholder must present any including but not limited to . . . judicial order, [or] legal
bona fide third-party offer to the other shareholders of process.”

1. 122 A.D.2d 873, 505 N.Y.S.2d 920 (2d Dep’t 1986).

The last notable decision predating the statutory of Appeals, held that the petition prima facie set forth
addition of internal dissension as a separate ground for adequate grounds for dissolution, and granted a hear-
dissolution is In re Pivot Punch & Die Corp.28 In Pivot ing.
Punch, a 50% shareholder whose employment by the
corporation was terminated by a prior arbitration Judge Jasen’s analysis of the statutory requirement –
award, and who subsequently had no voice in the man- that dissolution be beneficial to the shareholder – is sig-
agement of the business and received no income, sought nificant as the first New York dissolution decision
dissolution based on the inability to elect a board of equating a close corporation and a partnership. As
directors. The trial court, in a decision written by then- Judge Jasen wrote:
Justice Matthew Jasen before his elevation to the Court
In determining what is beneficial to the stockholders,
the court must take into consideration the type of cor-

Journal | October 2004 31

poration we are dealing with in this case. We have here Additional changes were made in BCL § 1111. BCL
what is generally referred to as a close corporation, § 1111(a) expressly provides that dissolution of a corpo-
“one that has been organized by an individual or a ration is within the court’s discretion. BCL § 1111(b) also
group of individuals seeking the recognized advan- specifies criteria that the court “shall take into consider-
tages of corporations . . . but regarding themselves basi- ation” in making its decision. First, “the benefit to the
cally as partners.”29 shareholders of a dissolution is of paramount impor-
tance.”34 Second, “dissolution is not to be denied mere-
Judge Jasen next observed that the subject corpora- ly because it is found that the corporate business has
tion “is simply a partnership consisting of [the petition- been or could be conducted at a profit.”35 The absence of
er and respondent], clothed with the benefits peculiar to injury to the public interest is no longer a criterion as in
a corporation, limited liability perpetuity and the the predecessor statute.36
like.”30 The opinion also cited federal tax law permitting
close corporations to elect pass-through tax treatment as The express addition of internal dissension as a sepa-
partnerships, and partnership law permitting dissolu- rate ground for dissolution in BCL § 1104(a)(3), together
tion at will.31 Judge Jasen then turned to the heart of his with the de-emphasis on corporate profitability and the
analysis: omission of the public-injury inquiry as dissolution cri-
teria in BCL § 1111, suggest a legislative intent to liber-
In addition to the technical rules surrounding a part- alize the circumstances under which 50% shareholders
nership and perhaps from a purely moral point of view, can petition (as the Radom court put it) for the “judicial-
more important, there exists between partners the high- ly imposed death” of a close corporation. The case law
est degree of fidelity, loyalty, trust, faith and confidence. in the decades following enactment of the BCL, howev-
When these characteristics in a partnership cease, then er, indicates that the liberalization has taken hold spo-
the true partnership ceases, and when these character- radically and that, as in the Second Department’s Fazio
istics cease between owners of equal, or verily, substan- decision cited at the beginning of this article, corporate
tially equal, shares in a close corporation, the close cor- viability and profitability often trump shareholder acri-
poration ceases to be beneficial to the deadlocked stock- mony.
holders. In the opinion of this court, the benefit to the
stockholders within the meaning of article 9 of the Cases Denying Dissolution
General Corporation Law, is adequately alleged.32 Fazio is one of several significant appellate decisions

Pivot Punch’s emphasis on the partner-like bonds and denying dissolution petitions based on internal dissen-
mutual fidelity of shareholders in close corporations is a sion, in which the courts seemingly elevate concern for
significant counterpoint to cases such as Cantelmo, the corporate body and fisc over the breakdown of
Radom and Seamerlin, which focus on corporate viability. mutual trust and loyalty between business partners.
As seen below, in the decades since the enactment of
BCL § 1104(a)(3) authorizing dissolution based on inter- In In re Dubonnet Scarfs, Inc.,37 a divided First
nal dissension, persuading the court to view a contest Department panel affirmed the dismissal without a
between 50% shareholders, on the one hand, as more hearing of a dissolution petition brought by 50% share-
akin to a partnership dispute or, on the other hand, as a holders of a profitable knitwear manufacturing compa-
fight over corporate policies and viability, can make the ny with 61 employees. The record included evidence
difference between the grant and denial of a dissolution that the company had $2 million cash and another $1
petition. million in near-liquid receivables. The respondent 50%
shareholder had served as the company’s CEO for 30
Adoption of Internal Dissension years; he denied the petitioners’ allegation that he mis-
As Ground for Dissolution represented his agreement (never implemented) to pur-
chase their interest at fair value.
The GCL and Stock Corporation Law were over-
hauled and consolidated in the new BCL enacted in 1961 The majority found that internal dissension had not
and made effective in 1963. Provisions for judicial dis- resulted in any deadlock and that the “only reason” the
solution were codified in BCL Article 11. BCL § 1104, petitioners sought dissolution was to raise cash to satis-
entitled “Petition in case of deadlock among directors or fy their personal creditors. “Needless to say,” the major-
shareholders,” included a new provision in subpara- ity wrote, “the mere fact that a closely held corporation
graph (a)(3) permitting dissolution on the ground of may have substantial liquid assets, and a stockholder
internal dissension. The legislative history indicates that has personal financial problems totally unrelated to the
the purpose of the new subparagraph “is to make clear corporation do not, in and of themselves, state grounds
that dissension between factions of shareholders, partic- for judicial dissolution” under the BCL.38
ularly in small corporations, which makes continued
association unworkable and the continuance of the cor- The Dubonnet dissent argued that internal dissension
porate business no longer advantageous to the share- as used in the statute was intended to augment dead-
holders, is also a reasonable ground for dissolution.”33
Journal | October 2004
32

lock and is not limited to dissension respecting manage- irreconcilable or terminal to the well-being of the cor-

ment of the corporation’s affairs. Rather, it is broad poration are among the issues to be determined at a
enough to encompass the alleged internal dissension hearing.45

regarding the use of the corporation’s substantial liquid In In re Parveen,46 the First Department reversed an

assets. The dissent also pointed to BCL § 1111(b)(3)’s order of dissolution rendered after a trial between 50%

provision that the continued making of a profit by the owners of a pharmacy business. The opinion notes that
corporation is not a bar to its dissolution.39 the “relationship between the parties eventually broke

The dissension-leading-to-deadlock formulation in down” over the issue of capital contributions. Nonethe-
Dubonnet reappears in In re Kaufman.40 There, the Second less, the court found BCL § 1104 “inapplicable”

Department affirmed an because the petition “mere-

order dismissing a dissolu- A number of significant decisions ly” alleged that there was
tion petition where the “peti- only one shareholders’ meet-

tioner failed to demonstrate . . . conclude that the benefit ing since the venture’s incep-
that the dissension between tion and that financial infor-
him and the respondent has to the warring shareholders mation was not regularly dis-

resulted in a deadlock pre- from a business divorce outweighs seminated. The court also
cluding the successful and held that the petitioner’s

profitable conduct of the cor- the interest in continuing the claim, that the respondent
poration’s affairs” or that the exercised sole control over
corporate business. the corporation’s daily man-
parties’ disagreements

“posed an irreconcilable bar- agement, “does not create a

rier to the continued func- cause of action for dissolu-
tioning and prosperity of the corporation.”41 tion, because there are no allegations that [the respon-

In In re Glamorise Foundations, Inc.,42 the First dent’s] control gave rise to deadlock over a manage-

Department vacated a dissolution order and remanded ment decision.”47

the case for trial. The lower court had ordered dissolu- Cases Granting Dissolution
On the other side of the ledger are a number of sig-
tion under BCL § 1104(a)(3) based on the owners’ dis-
nificant decisions at the appellate and trial court levels
agreement over a business plan proposed by one of granting dissolution petitions based on internal dissen-
sion, in which the courts conclude that the benefit to the
them, finding that “the relationship between the two warring shareholders from a business divorce out-
principals had markedly deteriorated.”43 The appellate

court disagreed, writing:

The fact that the parties disagree over petitioner’s plan weighs the interest in continuing the corporate business.
for the company’s future is not dispositive of the fun-
damental issue of whether the conditions of the statute In In re Sheridan Construction Corp.,48 the Fourth
have been satisfied such that the extraordinary step of Department affirmed a dissolution order involving five

judicial dissolution is warranted. And the initiation of related corporations in the construction business owned

this proceeding alone – or even the existence of multi- equally by two brothers. The court observed that “fra-

ple lawsuits between the parties – is similarly insuffi- ternal strife resulted in a bitter feud,” that there was “no
cient for this purpose.44 hope of reconciliation between these two brothers in the

The Glamorise opinion notes the existence of multiple ‘foreseeable future,’” and that they could find “no com-
lawsuits between the parties and the issuance of a mon ground of agreement in any respect.”49 The broth-

restraining order in the case before it. Intimating the ers’ disagreements and the intensity of their discord

rancorous tone of the parties’ filings, the court added became so great that efficient management became

that “impossible” and therefore dissolution would benefit

the tenor of the lawsuit cannot be cited to bootstrap the the shareholders and was the “only practical and feasi-
arguments made or justify the relief sought. It is ble solution.”50
[respondent’s] contention that petitioner deliberately
In re Surchin51 is a trial court decision granting disso-

created the underlying dispute for the very purpose of lution based on deadlock and “serious internal dissen-
securing judicial dissolution and thereafter seizing the sion between the two parties” involving threats of per-
corporation for himself, his son and other management sonal violence, surreptitious monitoring of telephone
personnel. Indeed, despite the posturing of the parties, calls and financial improprieties by the respondent. The
the corporation continues to flourish. It is petitioner’s court stated that in considering whether dissolution
contention that the heart of the dispute involves the would be beneficial to the shareholders within the
direction that the corporation will take in the future.

Whether the differences on this issue are genuinely statute’s meaning, the term includes “the mental and

Journal | October 2004 33

physical well-being of a shareholder as well as financial with each other in years after disagreeing over profit
gain to him.”52 The court’s opinion relies heavily on distributions. The differences and animosity between
Pivot Punch’s analogy of shareholders in close corpora- the shareholders were sufficient to prevent the contin-
tions to partners, and comments that “dissolution ued efficient operation of the corporation without
would be in order even if money was being made quite regard to the underlying reasons and without ascribing
fully and readily by the corporation.”53 fault. “Rather, the critical consideration is the fact that
dissension exists and has resulted in a deadlock pre-
In In re Gordon & Weiss, Inc.,54 the First Department cluding the successful and profitable conduct of the cor-
affirmed a dissolution order entered without a hearing, poration’s affairs.”62
involving a profitable advertising business. The peti-
tioner sought dissolution after trying unsuccessfully to Conclusion
buy out the respondent, and following several other The addition of internal dissension as separate
lawsuits between the owners. The respondent accused
the petitioner of bad faith in seeking dissolution based ground for dissolution clearly was meant to expand the
on nothing more than his desire not to continue in busi- availability of the dissolution remedy. Because every
ness with the respondent. corporate dissolution case comes with unique facts,
however, any attempt by the Legislature or the courts to
In affirming dissolution, the court stated that “this is set hard-and-fast dissolution criteria is doomed to fail-
a service corporation” in which client services are per- ure.
formed by the two owners who “are not working
together.” The court also referred to BCL § 1111(b)(3) as Cases decided under the internal dissension statute
a change from the “earlier thinking” (for which it cited exhibit something of a split personality, depending on
Radom) which “stressed the distinction between the cor- whether the court views the corporation, successful or
poration as an entity and the shareholders, and as long not, as more akin to a partnership terminable at will, or
as the former could continue to function profitably the as an entity distinct from its owners, to be maintained if
relationship between the shareholders was of no financially viable notwithstanding internecine warfare.
moment.”55 Noting that the relationship between share- Arguably, this duality is inherent in the statute’s
holders in a closely held corporation “closely approxi- requirement that the petitioner establish both the exis-
mates the relationship between partners,” the court rea- tence of internal dissension and that the factions are so
soned that “when a point is reached where the share- divided that dissolution would be beneficial to the
holders who are actively conducting the business of the shareholders. In other words, the statute can be read
corporation cannot agree, it becomes in the best interests such that the cessation of shareholder hostilities itself is
of those shareholders to order a dissolution.”56 an adequate benefit of dissolution, or it can be read to
require some other benefit (i.e., financial) that may be
The First Department affirmed another dissolution hard to show when the business is otherwise viable and
order in In re T.J. Ronan Paint Corp.,57 involving a fero- making money.
cious dispute between two 50% owners of a paint man-
ufacturing business. The dissolution proceeding was The best insurance against the uncertainty of busi-
preceded by protracted litigation including fraud claims ness divorce is a shareholders’ agreement with reason-
between the two 50% owners, during which one of them able buy-sell provisions. Other techniques include arbi-
was excluded from the corporation’s offices. The trial tration agreements, voting trusts and appointment of
court found that the “massive” court files evinced “bit- provisional directors.63 Clients starting new business
ter antagonistic dissension” between the parties, includ- ventures with co-owners should be strongly encouraged
ing attempts to secure intervention by the district attor- to make the up-front investment in these types of con-
ney.58 sensual arrangements to minimize the later risk of a
judicially imposed death – or life – sentence for their
On those facts the appellate court held that the corporation.
“degree of dissension, reflected by the intense personal
hostility, poses an irreconcilable barrier to the continued 1. In re Fazio Realty Corp., 781 N.Y.S.2d 118 (2d Dep’t 2004).
functioning and prosperity of the corporation, a hope-
less deadlock which mandates dissolution as the only 2. Id. at 119.
viable remedy.”59 As in Gordon & Weiss, the court opined
that the loyalty and good faith expected of shareholders 3. See, e.g., In re Parveen, 259 A.D.2d 389, 687 N.Y.S.2d 90 (1st
in close corporations, as in partnerships, is destroyed Dep’t 1999) (there can be no deadlock where contending
when “dissension becomes the order of the day.”60 factions never attempted to elect directors).

Finally, in Goodman v. Lovett,61 the Second 4. For a comprehensive review of the law governing share-
Department affirmed a dissolution order entered with- holder oppression, dissolution and valuation proceedings
out a hearing where the two owners had not spoken under BCL §§ 1104-a and 1118, see the author’s two-part
article in the May/June and July/August 1999 NY State
Bar Journal, Vol. 71, Nos. 5 and 6.

34 Journal | October 2004

5. In re Cristo Bros., 64 N.Y.2d 975, 489 N.Y.S.2d 35 (1985). 36. “The additional criterion embodied in Section 117 of the
[GCL] that the dissolution be ‘not injurious to the public’
6. As noted by the Court of Appeals in Cristo, id., the leg- has been omitted; the revisers felt that in the types of cor-
islative history of BCL § 1118 contains no indication why porations subject to the BCL, the interests of the share-
it accorded buy-out rights for dissolution petitions under holders should override the public interest in the contin-
BCL § 1104-a but not under BCL § 1104. uance of the business.” 4 White, New York Corporations
§ 1111.01[2], text accompanying n.10.
7. See In re Clemente Bros., 19 A.D.2d 568, 239 N.Y.S.2d 703
(3d Dep’t 1963) (reinstating bad faith affirmative defense 37. 105 A.D.2d 339, 484 N.Y.S.2d 541 (1st Dep’t 1985).
in dissolution proceeding). 38. Id. at 343.
39. Id. at 345–46.
8. For a discussion of the early history of dissolution legisla- 40. 225 A.D.2d 775, 640 N.Y.S.2d 569 (2d Dep’t 1996).
tion, see Hitch v. Hawley, 132 N.Y. 212 (1892). Verplanck v. 41. Id. at 775–76.
Mercantile Ins. Co., 1 Edw. Ch. 84, 6 N.Y. Ch. Ann. 68 42. 228 A.D.2d 187, 188, 643 N.Y.S.2d 94 (1st Dep’t 1996).
(1831), is one of the earliest cases holding that New York 43. Id. at 188.
courts have no common law authority to dissolve corpo- 44. Id. at 189.
rations and that statutory remedies are exclusive. 45. Id.
46. 259 A.D.2d 389, 687 N.Y.S.2d 90 (1st Dep’t 1999).
9. Hitch, 132 N.Y. at 217. 47. Id. at 391.
48. 22 A.D.2d 390, 256 N.Y.S.2d 210 (4th Dep’t 1965).
10. Id. at 218. 49. Id. at 391–92.
50. Id. at 392.
11. The GCL was repealed by 1973 N.Y. Laws ch. 451, § 2. See 51. 55 Misc. 2d 888, 286 N.Y.S.2d 580 (Sup. Ct., N.Y. Co.
discussion infra at “Adoption of Internal Dissension as
Ground for Dissolution.” 1967).
52. Id. at 892.
12. See In re Superb Diamond Cutting Corp., 183 Misc. 876, 878, 53. Id.
51 N.Y.S.2d 651 (Sup. Ct., N.Y. Co. 1944). 54. 32 A.D.2d 279, 301 N.Y.S.2d 839 (1st Dep’t 1969).
55. Id. at 281.
13. The text of GCL §§ 103 and 117 is set forth in In re 56. Id.
Cantelmo, 275 A.D. 231, 232, 88 N.Y.S.2d 604 (1st Dep’t 57. 98 A.D.2d 413, 469 N.Y.S.2d 931 (1st Dep’t 1984).
1949). 58. Id. at 415.
59. Id. at 421.
14. Cantelmo, 275 A.D.2d 231. 60. Id.
61. 200 A.D.2d 670, 607 N.Y.S.2d 52 (2d Dep’t 1994).
15. Id. at 233. 62. Id. at 671.
63. 4 White, New York Corporations § 1104.05.
16. Id. at 235.
35
17. 128 N.Y.S.2d 81 (Sup. Ct., N.Y. Co. 1953).

18. The Bankhalter petitioner was a one-third shareholder
whose consent was required for any action by the board
or shareholders. Former GCL § 103 and current BCL
§ 1104(b) both permit shareholders with less than 50% of
shares to seek dissolution when the certificate of incorpo-
ration has super-majority voting requirements for board
action or elections. Unlike its predecessor, BCL § 1104(b)
sets a one-third minimum.

19. Bankhalter, 128 N.Y.S.2d at 83, 85.

20. 307 N.Y. 1 (1954).

21. 307 N.Y. 407 (1954).

22. Radom & Neidorff, 307 N.Y. at 6–7.

23. Id. at 7.

24. Id. at 6, 7.

25. Id. at 7 (citations omitted) (quoting Hitch v. Hawley, 132
N.Y. 212, 221 (1892); GCL § 117).

26. In re Seamerlin Operating Co., 307 N.Y. 407, 413–14 (1954).

27. Id. at 417 (citations omitted).

28. 15 Misc. 2d 713, 182 N.Y.S.2d 459 (Sup. Ct., Erie Co.),
modified on other grounds, 9 A.D.2d 861, 193 N.Y.S.2d 34
(4th Dep’t 1959).

29. Id. at 715 (quoting N.Y.S. Law Review Comm’n and New
York Leg. Doc. No. 65K [1948] p. 389 et seq.).

30. Id. at 715–16.

31. Id. at 716.

32. Id.

33. McKinney’s Cons. Laws of N.Y., Legislative Studies and
Reports, BCL § 1104 (2003).

34. BCL § 1111(b)(2).

35. BCL § 1111(b)(3).

Journal | October 2004